The 2020 Deadline: No Excuse Left for Delaying the Energy Transition

Energy intensity -- energy use per dollar of GDP -- is the last refuge of fossil fuel proponents. Instead of measuring real improvement in energy efficiency, it hides the outsourcing of dirty, coal-based manufacturing to developing countries and changes during times of economic growth or recession, irrespective of efficiency.

The problem is in the denominator. As Jeremy Grantham, chief investment strategist of the $106 billion Boston-based investment-management firm GMO, told BBC last month, "it turns out that GDP in the U.K. and GDP here is a pretty awful mishmash of things. It's really more a description of costs than it is of utility, of output."

Over the past decade, the world has been forced to produce more and more of its oil from expensive and risky projects in the deep waters off the Gulf of Mexico and off the coast of Brazil to replace the cheap oil from declining mature fields in places like Saudi Arabia. We're replacing oil that costs $10 a barrel to produce with oil that costs $80 a barrel or more, Grantham explains. But that cost inflation increases GDP, making the energy intensity ratio look like it's improving.

"Now that is clearly nonsense. Society is paying a bigger price to get out the expensive oil -- it needs the oil to function," Grantham protests. "GDP is calculated inaccurately -- it's counting what is obviously a cost and including it as if it were a virtue, as if it were a gain."

Yet oil companies and government agencies continue to cite improvements in energy intensity as if it indicated progress -- as if global energy consumption and CO2 emissions were not still climbing without the prospect of any real policies that might turn that trend around. "Energy per unit of income as measured by GDP continues to fall, and at an accelerating rate," BP crows in its Energy Outlook 2030. "Global energy demand does not rise as dramatically as economic growth as a result of declining energy intensity," ExxonMobil offers soothingly in its Outlook for Energy: A View to 2040. The "decoupling between energy consumption and economic growth…is likely to alleviate the environmental pressures of energy production and consumption," asserts the European Environment Agency.

But these assurances are meaningless. The dangers of climate change increase as long as total CO2 output does.

And we're now within spitting distance of exceeding the generally accepted limit of global temperatures rising 2 degrees Celsius over pre-industrial levels. The International Energy Agency, among others, says that global CO2 emissions from energy must peak before 2020.

This is a very tall order. Global investment bank HSBC recently calculated that between two-thirds and four-fifths of current fossil fuel reserves will have to stay in the ground to meet that goal, unless carbon capture and storage (CCS) technology can be deployed at scale.

Yet faced with such an enormous and imminent challenge, we still lack any meaningful policy response. CCS is far from becoming economically viable; even its most ardent champions admit it's a non-starter without government subsidies in the range of hundreds of billions of dollars. The roulette wheel of carbon-oriented policies -- cap-and-trade, cap-and-tax, carbon taxes, and so on -- has failed to turn up a winner after decades of trial and debate. One international climate summit after another has failed to produce effective policies. The clock has effectively run out already for the soft path the Intergovernmental Panel on Climate Change hoped for, in which developing economies rise to a standard of living that naturally improves their energy efficiency,

Indeed, we are seemingly intent on making the problem worse. According to the IEA, over half a trillion dollars are being spent annually on direct fossil fuel subsidies worldwide, which encourages continued fossil fuel consumption and carbon emissions. IEA chief economist Fatih Birol recently called those subsidies "public enemy number one for sustainable energy development." If the real costs are taken into account -- including unpriced externalities like air pollution and climate damage -- the IMF estimates that the bill is $1.4 trillion per year, and that the United States ($502 billion per year), China ($279 billion per year), and Russia ($116 billion) are the biggest offenders.

Carbon emissions are not the only reason why fossil fuel consumption cannot continue growing as it has in the past. Consumers can't tolerate the prices that would be needed to produce the next tranche of supply. A new report by OECD researchers found that if global growth rates return to slightly below where they were before the 2008 crisis, the global Brent benchmark price for oil would have to soar far above the 2012 levels at which it was already killing demand in OECD countries.

We're just seven years away from the 2020 deadline on carbon emissions, which we're in no way prepared to meet. But that's not all.

By 2020, the combined production of all fossil fuels will occur and enter decline, according to a new report from the Energy Watch Group, a Germany-based international network of scientists, government officials, and members of non-governmental organizations. If the world does not rapidly transition to renewables, it could quite literally find itself running out of affordable fuel.

The good news is that energy transition is possible. And several new forecasts suggest that by 2020, it will be very affordable.

A new report by Citigroup forecasts that the rapid cost decline of solar will make it competitive with fossil-fueled grid power by 2020 in much of the world. “The perception of renewables as an expensive source of electricity is largely obsolete,” the Citi analysts say. Researchers at Stanford University project that utility-scale solar will reach grid parity by 2020. The Institute for Local Self-Reliance finds that rooftop PV is already cheaper than grid power for more than 10 percent of residential demand in five U.S. states, and by 2022 the same will be true for every state except gray-skied and hydro-rich Washington.

If we must execute a significant transition from fossil fuels to renewables by 2020 in order to stay within our budgets for carbon emissions and affordable fossil fuels, and if we believe that renewables will be affordable by that time, then why aren't we doing it?

The only remaining argument against energy transition is that our creaky old grids can't handle much intermittent power, and so we'll always need full generation capacity from fossil fuels. But even that argument has been busted. So-called baseload power is already being squeezed out of the grid due to the poor economics of traditional power generation, and many utilities are struggling to remain competitive. Accommodating more renewable power mainly requires good grid planning, not new technology. In Germany, where renewables now provide about 25 percent of total grid power and meet as much as 50 percent of peak power, a study by an engineering association found that its grid can handle up to a 40 percent share of renewable power without needing much storage or baseload power for backup. Meanwhile, the search for economical electrical storage technologies continues apace, with promising results.

There is no excuse left for pretending that we can persist with business as usual and continue relying on fossil fuels while waving our hands vaguely at CCS, carbon taxes, and energy intensity trends. We don't even need an international agreement on carbon emissions. We simply need to eliminate fossil fuel subsidies and put that money into energy transition. According to Bloomberg New Energy Finance, global investment in clean energy in 2012 was $268.7 billion, of which $142.5 billion was for solar. Simply transferring global fossil fuel subsidies to solar would triple the solar market, allowing it to reach grid parity well before our 2020 deadline.

It's time to stop dithering and get busy on energy transition.

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Chris Nelder is an energy analyst and consultant who has written about energy and investing for more than a decade. He is the author of two books (Profit from the Peak and Investing in Renewable Energy) and hundreds of articles, and has been published by Scientific American, Slate, the Harvard Business Review blog, Financial Times Alphaville, Quartz, the Economist Intelligence Unit, and many other publications.